Paul I haven't found anything else on Finova but here's a piece of news on their loan.
Fund Alleges Finova Propped Up Supercom To Sell Bonds
By ANNE BRADY
Of DOW JONES NEWSWIRES
PHOENIX -- The Louisiana School Employees Retirement System, now the lead plaintiff in a consolidated class-action securities case against Finova Group Inc. (FNV), alleges that Finova loaned additional money to a nearly bankrupt customer so that Finova wouldn't have to write off the loan immediately and could successfully carry out a sale of $1.15 billion in bonds.
For the first time in its amended complaint, the pension fund, which claims to have lost more than $1 million investing in Finova bonds and stocks, put a name to the California computer distributor whose $70 million defaulted loan launched a chain of events in March that combined to drive down Finova's stock price from about $30 a share a year ago to $1.21 Friday. The Scottsdale, Ariz., financial services company now faces the possibility of bankruptcy itself.
The company that defaulted on that loan, according to the LSERS' complaint, was Supercom Inc., formerly of Fremont, Calif. In its motion to dismiss the complaint, Finova also now refers to the defaulted loan as the Supercom loan. Previously, Finova had declined to reveal the name of the loan recipient.
Last May, Supercom USA was taken over by Supercom Canada, and its U.S. headquarters were moved to New Jersey. Executives there could not be reached for comment Friday. A Finova spokeswoman said the company does not comment on litigation.
Previous litigation filed by stockholders had speculated that Finova executives knew or should have known that the loan would have to be written off, and that they therefore should have notified the investment community sooner that the loan was headed for default. The LSERS case, filed last fall in U.S. District Court in Phoenix, outlines a chain of specific events alleged to have occurred in conjunction with a loan to Supercom.
According to the complaint, Finova executives first learned in late 1998 that Supercom was experiencing large operating losses and had provided Finova with "materially misstated" financial information. Finova Chief Executive Matthew Breyne essentially acknowledged this in an April interview with the Arizona Republic, in which he said Finova "started to exit the account" in late 1998 due primarily to delinquencies and "unreliable financial reporting and chronic overadvances."
The lawsuit alleges that beginning in late 1998, Supercom was required to provide monthly financial reports to Finova. These reports revealed inventory and cash flow problems at Supercom, and by February, Finova knew that Supercom owed vendors $3 million and could buy products only for cash on delivery, the suit alleges.
In April 1999, Finova temporarily suspended credit to Supercom, the suit alleges. According to published reports, Supercom over the next year closed six regional branches - half of its offices - and laid off 30% of its workforce before being absorbed by its Canadian counterpart in May 2000.
Supercom Chief Operating Officer Larry Leong met in August 1999 with Breyne and told Finova's then-COO that Supercom was "perilously close to filing for bankruptcy," according to the suit.
LSERS alleges that Finova then "agreed to advance additional funds to Supercom so that Supercom could pay interest on its (original) debt to the company." This was allegedly done so that Finova could proceed with a $1.15 billion note sale on Nov. 1, 1999. LSERS bought $3.9 million face value of those 7.25% notes.
"Rather than record a charge to earnings to reflect the impairment of this loan, the company propped up Supercom by extending additional borrowings," the suit alleges.
In its motion to dismiss, Finova argues that beginning in the second quarter of 1999, it listed the Supercom loan in filings with the Securities and Exchange Commission as "revenue accruing impaired," which notified investors that the loan was troubled.
LSERS alleges it was only "revenue accruing" because Finova loaned Supercom additional money with which to make payments.
Finova also argues that desire to maintain a company's credit rating does not create motive, and that Finova executives lost more than anyone when the stock tanked.
In March 2000, when Finova announced it was writing off the loan and that longtime CEO Sam Eichenfield was retiring, Finova shares fell dramatically and continued falling as additional bad loans were revealed, and concerns grew about the company's ability to pay or restructure $1.6 billion in bank debt due this spring.
Finova stock analysts complained that they had been led to believe the $70 million debt was not in imminent danger of having to be written off.
"There were warning signs, but it was a surprise," said analyst David Sochol of Legg Mason.
He said he had become concerned prior to March that Finova's "revenue accruing impaired category was becoming ever larger."
He said he also became concerned about where the companies with impaired loans were getting the money to make payments.
Analyst Reilly Tierney of Fox-Pitt Kelton Inc. said classifying the loan as "revenue accruing impaired" was appropriate. He noted, though, that because those in the investment community believed that Finova wrote small, secured loans, many were surprised when Finova wrote down a $70 million loan to zero.
He felt misled about the nature of Finova's business, but said he believed the Supercom loan "fell apart at the last minute" when Supercom failed to find a buyer for its business.
Now it is Finova that has been exploring strategic alternatives since March and appears to be running out of time to sell itself or secure a major cash infusion. Ratings agencies continue to downgrade the bonds as the possibility of a bankruptcy filing looms larger.
-By Anne Brady, Dow Jones Newswires, 602-258-2003 |
